Russia’s Arctic economy is heading for decline

Though oil and gas reserves in Russia’s vast Arctic zone are vast, the only economic bright spot is unsanctioned Nornickel, a world-leading producer of nonferrous metals.

Arctic economy of Russia
The Russian Navy’s only aircraft carrier, Admiral Flota Sovetskogo Soyuza Kuznetsov, is towed to a shipyard in Murmansk, Russia, May 20, 2022 for maintenance and repair work. With 325,000 inhabitants, Murmansk is the largest city north of the Arctic Circle. ©Getty Images
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In short

  • Western sanctions begin to cut oil and gas revenues
  • Investment has dried up, making production targets unrealistic
  • Trading partners will likely bypass the North Sea Route

By geographic luck, Russia is a great arctic power. The length of its coastline along the Arctic Ocean is 22,600 kilometers, almost 60 percent of the world’s Arctic coastline. The entire arctic zone covers four million square kilometers and is sparsely populated due to the harsh climate. The three largest Arctic cities are in Russia: Murmansk (325,000 inhabitants), Norilsk (205,000 inhabitants) and Vorkuta (85,000 inhabitants). The fourth largest city is the Norwegian city of Tromso (62,000 inhabitants). In total, only 2.4 million people live in the Russian Arctic, of whom 300,000 belong to 47 indigenous ethnic groups. The rest are migrants and their descendants from more southern regions of Russia and the former Soviet Union.

Two decades of slave labor

In the 1930s, people came to the arctic areas to explore large deposits of discovered nickel, copper and gold. The Soviets decided to use the North Sea Route as the shortest shipping route from the northern European part of the Soviet Union to the Far East, connecting the Atlantic and Pacific when they are navigable in summer and autumn.

In these areas, the massive use of labor from the gulags began. For example, the construction of the Norilsk Mining and Metallurgical Combine – known today as Nornickel – was supported by hundreds of thousands of prisoners, many of whom died from disease, malnutrition and the harsh climate. Prisoners prospecting for gold in the Kolyma River area suffered the worst conditions.

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After the death of Soviet dictator Joseph Stalin in 1953, the Gulags were liquidated. Arctic development was undertaken with a volunteer workforce, lured by higher salaries and the opportunity for early retirement. These incentives are still used today to attract workers to the Arctic.

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facts

The arctic region

The eight Arctic nations are Canada, Denmark, Finland, Iceland, Norway, Sweden, Russia and the United States. They are all members of the Arctic Council, the leading international forum for addressing regional issues.

Huge oil and gas deposits

The next phase of Arctic exploration began after the discovery of large oil and gas fields that formed the basis of Soviet and Russian exports. Although less than 2 percent of Russia’s 145 million people live in the Arctic, the region generates almost 10 percent of the country’s economic output. In 2020, 80 percent of Russia’s combustible natural gas (including gas liquids) and 17 percent of its oil were produced there.

The continental shelf contains more than 85.1 trillion cubic meters of natural gas and 17.3 billion tons of oil. The strategy for developing the Arctic zone of the Russian Federation and ensuring national security by 2035, approved by President Vladimir Putin in 2020, declares these resources a “strategic reserve for the development of the mineral resource base of the Russian Federation. ”

Missing investment

The development of the North Sea Route is an essential part of the success of the Arctic economy. To this end, the Russian government plans to invest $29 billion and take the following steps:

  • Development of infrastructure of seaports and shipping lanes in the waters of the northern seas – from the Barents Sea to the Chukchi
  • Creation of a Naval Operations Headquarters throughout the Northern Sea Route water area
  • Integration of transport and logistics services provided in the waters of the North Sea Route based on a digital platform designed for paperless registration of multimodal transport of passengers and cargo
  • Build at least eight nuclear icebreakers for year-round navigation
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Significant investments in the development of the economy of the Arctic zone, and especially in the development of the extractive industry there, were also expected.

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Goals for the economic development of the Arctic in Russia by 2030

However, the achievement of these goals was already in doubt before 2022. This was due to two main factors. First, there was a lack of investment in the oil and gas sector in the 2010s. This was due to the sustained deterioration in the investment climate, including the first Western sanctions package imposed on Russia in 2014 following the annexation of Crimea. Second, the emerging green transition in developed economies will reduce demand for non-renewable energy sources by 2030.

The sanctions imposed on Russia after its invasion of Ukraine in February 2022 have further complicated prospects for the development of the Russian Arctic. The gradual embargo on oil and gas purchases from Russia is taking effect. In addition, potential trading partners are likely to be reluctant to use the North Sea Route for international transit of goods. This likelihood will severely limit the demand for goods and services that the Russian Arctic can produce.

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This is especially true for natural gas, the production and transport of which for export has already declined. In the first half of 2022, Russia reduced natural gas production by almost 7 percent compared to the same period in 2021. In June, Russia produced a little more than 39 billion cubic meters of gas – 23 percent less than in the same month last year.

Oil production has also started to fall and the European oil embargo that begins in December will only reinforce this trend. Production fell in August for the first time since April – by 170,000 barrels per day to almost 11 million barrels per day. In August, Russian oil export revenues fell by $1.2 billion (to $17.7 billion). This was despite exports increasing by 220,000 barrels per day to 7.6 million barrels per day.

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scenarios

It can be assumed that there will be no new major economic projects in the Russian Arctic or in the rest of the country in the foreseeable future. In the absence of investment funds, there will be a gradual deterioration of these areas. The only exception is the Norilsk Industrial District, where 44 percent of the world’s palladium and 22 percent of the high-grade nickel are mined. Apparently, the Norilsk Nickel Corporation is not subject to European and American sanctions because of its global importance.

A decline in economic activity in the Russian Arctic has advantages. The pressure on the fragile environment will ease, making it easier to rid this area of ​​the accumulated waste of the last few decades.

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